SOMETIMES YOU SHOULDN’T DO IT
It’s almost always worth a try to do a short sale. If it fails you lost nothing, right? Almost right. We all have heard of the benefits to a short sale: walk away mortgage debt free (usually), and lesser impact on the credit score.
But what are the costs and risks of a short sale?
A short sale can hurt more than a foreclosure sale under some very limited circumstances:
SOME HOMEOWNERS PREFER NOT TO DISCLOSE FINANCIAL INFORMATION TO THE LENDER REQUIRED TO DO A SHORT SALE
A short sale usually requires the homeowner to disclose to the lender private financial information- even those dreaded tax forms! The lender can and will use that information against the homeowner to collect any debt that may remain after the short sale; or if the short sale fails, the lender could also use that private financial Information to collect debt remaining after a foreclosure trustee sale.
A foreclosure sale does not require the homeowner to disclose any financial information. So one big reason not to do a short sale and instead, jump straight to a foreclosure sale, is if the homeowner does not want to disclose private financial information to the lender.
SOME HOMEOWNERS PREFER THE SHORTER TIME CONSTRAINT FOR A LENDER TO FILE A LAW SUIT AGAINST THE HOMEOWNER AFTER A FORECLOSURE SALE
The homeowner should not short sell if the homeowner knows that she cannot get the deficiency judgment waived and the homeowner prefers the shortened amount of time limit for the lender to file a law suit. The statute of limitations requires that a lender must file its law suit within six (6) YEARS after a short sale. On the other hand, the statute of limitations requires that a lender must file its lawsuit within six (6) MONTHS after a foreclosure sale. (Second liens, however, usually have a six (6) year statute of limitations for either a foreclosure sale or a short sale.)
Because it is hard to explain, I will rephrase it another way: If for whatever reason, the homeowner believes that she cannot get the lender to forgive the deficiency judgment as part of the short sale, then the homeowner may wish to “take her chances” with foreclosure and wait out the six (6) months, rather than wait out the six (6) years if the homeowner completes the short sale.
The advantage of a foreclosure sale over a short sale is that in a foreclosure sale the lender must file suit within six (6) months; while in a short sale, the lender has six (6) years to sue. Six months can go by pretty quick and the lender may miss the deadline.